Kevin Drum - August 2011

In the face of implacable Republican obstruction to any kind of fiscal stimulus, I asked last night what Barack Obama could or should do to get the economy moving again. Jared Bernstein answers:

I like FAST! [Fix America's Schools Now, a national infrastructure program to repair, retrofit, insulate and “green-up” the nation’s stock of public schools] and recommend he runs with that, or some other idea that meets these criteria: it can be stood up quickly, it’s labor intensive with a decent bang-for-buck re jobs, people get it and feel good abut it right off the bat (so, as much as I like the infrastructure bank idea, I’m not sure it works here).

“But wait!,” you shout. We’re out of bullets—there’s no more money for such things—and Congress will refuse to add any of this to the deficit. How can you advise the President to block everything else out and call for measures Congress will refuse to consider?!?

That’s the kind of second guessing, negotiating-with-yourself that has us stuck in the mud. The President needs to decide what this economy needs, make sure it meets the above criteria, especially the one about the solution being easy to understand and feeling good, and fight for it nonstop from here until the unemployment rate starts to steadily decline.

That sounds great, and I agree that writers and pundits should be demanding this kind of thing. But it doesn't change the fact that House Republicans will flatly refuse to even debate such a bill. So what's the real idea here? Not so much that it will actually help the economy, but that it might help Obama's reelection by firmly putting him on the side of the working man against a do-nothing Congress.

Which is fine with me. Because frankly, if the economy gets much worse, Obama runs a pretty strong chance of losing in 2012. But I have to say: if you're going to go down, you might as well go down fighting. Besides, a really ambitious program would give all the rest of us something to rally around, it would unite the Democratic Party, and it would give the chattering classes something to chatter about. In other words, it might actually use all the channels I talked about yesterday to move public opinion. And you know what? It might actually make a difference and, in the end, force Republicans into action. It's worth a try, Mr. President.

UPDATE:Matt Yglesias (and others) suggest using Fannie and Freddie, which are now wards of the state, to help "refinance or restructure a large number of outstanding mortgages in a way that will hasten the deleveraging process." In other words, unilateral executive action to help folks with underwater mortgages. That's more in the spirit of what I was asking last night: something aggressive that (a) doesn't require congressional action and (b) might actually make a difference.

Dana Milbank, on today's stock market plunge: "It’s not exactly fair to blame Obama for the rout: Almost certainly, the markets ignored him. And that’s the problem: The most powerful man in the world seems strangely powerless, and irresolute, as larger forces bring down the country and his presidency."

Michael Tomasky: "In [Alan] Brinkley’s words, Obama’s presidency 'is failing, and in danger of collapsing.' Lacerating battles await him on the budget (surprise: the debt deal didn’t solve everything!). The economy is grounded. Obama needs to quit trying to transform politics and just focus on winning fights on behalf of a careworn middle class. Otherwise, politics is going to transform him into a nicely intentioned one-term president."

Paul Krugman: "Earlier this week, the word was that the Obama administration would 'pivot' to jobs now that the debt ceiling has been raised. But what that pivot would mean, as far as I can tell, was proposing some minor measures that would be more symbolic than substantive. And, at this point, that kind of proposal would just make President Obama look ridiculous."

Matt Yglesias, asking what the White House plans to do that's comparable to FDR's executive order devaluing the dollar by raising the price of gold: "Where’s your Executive Order 6102? Serious people acknowledge the existence of big political constraints. But leaders who feel constrained look for ways forward."

All of this criticism might be well taken. Let's just stipulate that it is. Here's the question: what is it that you think Obama should do?

We can all name things we think he should have done in the past. But that's water under the bridge. Right now, the economy is what it is, and the Republicans who control the House flatly won't allow Obama to do anything about it. It hardly matters why. Maybe it's because of legitimate ideological differences. Maybe it's because it's not in their interest for the economy to get better before next November. Maybe they're just nuts. Regardless, they aren't going to allow any action that might improve the economy in the short term. End of story.

So: what's the answer? Do you think a bunch of hard-hitting speeches would make a difference? Do you think there are executive actions he could take? Do you think there are pressure points he could bring to bear to pull some Republicans over to his side?

This is a real question. I'm not trying to defend Obama or score debating points. I really want to know. What should Obama do?

I wrote at length yesterday that I thought Drew Westen was off base to blame most of President Obama's problems on his inability to tell a good story. The fact is that Obama has told a good story. It's just not the one Westen wants. What's more, Obama's problems are much more ones of policy than of explication. What he really needs is a better economy, but he never put the policies in place to get it.

But I guess I'm feeling cranky today (can you tell?), because now I want to take the other side and push back a bit on some of the blunter suggestions that storytelling doesn't matter at all. Here's Will Wilkinson:

Turning a crowd from hostility to adoration through pellucid, charismatic truthtelling is a venerable Hollywood trope, a close relative of the slow clap. But here on Earth Prime,1 presidential talking has little effect on the constraints the president faces.

Political scientist John Sides backs him up: "There is precious little evidence that presidents accomplish much by rhetoric—least of all large shifts in public opinion. In fact, when presidents start giving barn-burning speeches and drawing lines in the sand, guess what often happens? It makes it harder for presidents to get things done."

Granted: presidential speeches don't have a big impact. Probably they never have, but in any case the media environment is far too croweded today for a presidential address to have much effect on public opinion.

But there's more to this. When Westen talks about building a narrative, there's more to it than just a speech here and there. Presidents really do have a unique pulpit, and they really do have an opportunity to move public opinion. First, they do it by agenda setting. Both the public and Congress tend to follow a president's lead. Second, by repetition. A single well-turned speech might not make a big difference, but a persuasive narrative delivered over and over can. Third, presidents succeed by leading their party and getting them to adopt the narratives he wants them to adopt. Fourth, he can influence other thought leaders: journalists, talking heads, church/union/academic leaders, and so forth. They can amplify a narrative far beyond the circle of high-information voters who actually pay attention to presidential speeches.

Put all this together and presidential narratives almost certainly can have an effect. Not a huge one, maybe, but public opinion underlies everything in a democracy, and moving public opinion even a few points can make a big difference in a closely divided country. Unfortunately, Obama has had little success with most of these channels. His story has been one about the dysfunctional partisanship destroying Washington and how to move beyond it, and he's told this story well and often. However, he hasn't succeeded in making this into a broader agenda item; he hasn't succeeded in getting his own party to adopt this narrative as its own; and he hasn't succeeded in getting very many thought leaders to spread it to their audiences. I don't know why. Maybe it's because it was the wrong story for the wrong time, maybe it's because getting liberals to agree on a message is like herding cats, maybe it's because the left doesn't have a good media megaphone, or maybe it's because Obama just isn't very good at the broader task of narrative building. But whatever the reason, it just hasn't worked so far. And although I don't think it's his biggest problem, I think it is something that makes a difference. Unfortunately for Obama, he hasn't yet succeeded in harnessing it.

Matt Yglesias posts the chart on the right today, and it's a useful reminder that as bad as the Great Recession has been, it's still not within light years of being in the same league as the Great Depression. This has all sorts of implications for assessing things like monetary policy, Obama's ability to get things done, the depth of anger in the country, and so forth.

So yes: things are much better today then they were in 1933. Still, whenever I look at comparisons like this, I'm always struck by one way in which our situation today is worse. In 1933, nobody really knew what to do about a massive, persistent economic downturn. Keynes's theories hadn't yet gained wide currency, and conventional wisdom of the day was uniformly unhelpful. Certainly FDR was never a deliberate Keynesian: He did end up spending a lot of money, but mainly because he wanted to help people, not because he really thought that deficit spending per se was the answer to our problems. So in some sense it's forgivable that they didn't do a better job of combatting the Great Depression. They really didn't know any better.

Today we do, of course. And yet, we're still not willing to do what needs to be done. Partly this is thanks to mindless partisanship, partly because we just don't have the guts. It's pretty damn discouraging. At least our predecessors had the excuse of ignorance. What's our excuse?

The “signature” of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions. And that’s normally the signature of concerns about a weak economy and deflation risk (see Japan, decline of).

What triggered economy fears? To some extent I think this is a Wile E. Coyote moment, with investors suddenly noticing just how weak the fundamentals are. Also, the mess in Europe.

And maybe, maybe there is an S&P story — but not the one you think. Arguably, that downgrade will bully policy makers into even more deflationary, contractionary policies than they would have undertaken otherwise, which has the perverse effect of making US debt more attractive, since the alternatives are worse.

But all the Very Serious People, having totally misdiagnosed our problems so far, will probably double down on that wrong diagnosis as markets fall.

Two weeks ago, Neil Cavuto and John Stossel had an exchange on Fox Business Channel that was startling at the time, but seems even more relevant now....Cavuto, Fox News' vice president of business news, told viewers, "I would welcome a downgrade. I really would. I think it would be the pain from which we have a gain." Stossel added, "Maybe that would wake people up."

They didn't really elaborate why they would "welcome" the "pain," or what Americans were supposed to realize after having been awoken.

Well, I'm here to help. I learned two things during my morning ten minutes of Fox News today. First, Megyn Kelly is back. With new hair! Hoorah! Second, Jon Scott interviewed a psychologist "licensed in both Kansas and Missouri" — one whose name I've thankfully already forgotten. He was on the show to explain how growing government debt is related to our growing national obesity epidemic, and at first I figured there must be some dumb new study making this connection. But no. This was pure pop psychology: when times get "too good," people overindulge. Likewise, governments overindulge. They lose the discipline that makes both people and governments great. And then —

And then, even though I hadn't finished my morning stretches, I turned off the TV. This guy was just unwatchably lame. But his message was obviously one that both Scott and (presumably) his audience ate up: we have sinned, we have lived too high on the hog, and now we have to pay the price. Hopefully this will make us all into better people.

That's why they welcome the pain. We have sinned and we deserve it. Austerity will make the pain worse, but that's all for the best too. Because we deserve it. Oh, and maybe it will also help get that socialist Obama out of office. Boo-yah.

What with the debt ceiling and the eurozone crisis and the S&P downgrade, I haven't spent any time digging into the Wisconsin recall election and blogging about it. But Andy Kroll has been doing yeoman work on the recalls, and today he has a great short handicapping of the six races that will be decided tomorrow. Nickel version: it's gonna be a squeaker. Definitely worth a read.

I happen to think that all the chatter about the markets responding to the S&P downgrade is mostly misplaced. Obviously there's some reaction, but markets have been nervous for the past two weeks, and most of it seems to be related to problems in the eurozone. And I don't blame them: I'm pretty nervous about the eurozone too. Still, here's a contrarian take from Stuart Staniford. Back in the panic days of 2008, one of the financial indicators we all paid a lot of attention to was the TED spread, which measures how much banks charge to lend each other money. When it's high, it means there's a lot of stress in the system, but right now it's chugging along extremely placidly and indicating no problems at all. There's apparently no exact parallel measure for Europe, but as a rough proxy he looked at Euribor, the interbank lending rate in Europe. It's up a bit, but only a bit:

Stuart: "This is also showing no sign of undue stress. In short there is no evidence of any kind of generalized credit crisis in markets at the moment. However, it's worth noting from the TED data at top that such things can change extremely rapidly." This is your good news of the day, such as it is.

The recipients with the most to lose are the ones in rural America, who are almost twice as reliant on federal largesse as city dwellers and suburbanites. A recent fight over subsidies for flights to small-town airports is a good example of the battles likely to come. It also illustrates the trade-offs that Congress will confront as it tries to close the yawning federal budget gap.

Another good example is the postal service. Mail volume is down and they're hemmorhaging money, so among other things they'd like to close 3,700 underused post offices. And guess where most of those post offices are? They're in the same place as all the underused train stations that rural congressmen fight like crazed lemmings to protect: small towns and villages.

This is why the postal service has never been fully privatized, and it's why the free marketeers in the Republican Party have never quite brought themselves to permit private companies to compete with the postal service outside of parcel delivery. The postal service is required to provide universal service at a fixed price, even though service to rural areas costs far more than service to cities. The first thing a private competitor would do is specialize in junk mail, which heavily subsidizes ordinary letters, and the second thing it would do is restrict its service to densely populated areas. This would give it far, far lower costs than the USPS and allow it to siphon off its most profitable business segment. To compete, USPS would have to match private sector prices. Then they'd have to (a) raise prices substantially on first-class mail and (b) either pull out of rural areas entirely or else raise the price of delivery to small towns even more. The fire-breathing tea party conservatives responsible for this would find themselves in the unemployment line at the next election.

Eventually, of course, something like this is going to happen anyway. But the free marketers will put it off until catastrophic losses finally force them to admit the obvious: it costs a lot for the federal government to service rural America. Personally, I'm happy to do it, for the most part. We're all part of a single country and it's worth a little subsidizing of non-urban areas to keep everyone feeling that way. I just wish the residents of rural America would stop their endless whining about Uncle Sam's grasping tax bite when they're the ones who get the biggest piece of the pie. We can even things up any time they'd like.

From Economics of Contempt, formerly an in-house lawyer for an investment bank, explaining the difference between S&P and the other rating agencies when it came to making their case for getting a deal rated:

With S&P, it got to the point where we were constantly saying, “that’s a good point, but is S&P smart enough to understand that argument?” I kid you not, that was a hard-constraint in our game-plan.

That's actually one of the kinder things he has to say. The rest of the post is worth reading for the entertainment value alone.